The Euro Crisis Puts Political Leaders At Risk

by: November 4, 2011

George Papandreou is not the only European politician who is nervous about his job. Greek’s prime minister wouldn’t be the first leader to lose his position as a result of the ongoing euro crisis, and more are likely to follow.

Papandreou faces a vote of confidence on Friday, which could bring down his government. Even if he survives this test, he may not remain in power for long.

Already, political power in several nations has switched hands as a result of economic troubles within the euro zone. “Whenever someone comes up for an election, they lose,” says Kurt Volker, a former U.S. ambassador to NATO.

In addition to Greece, Ireland and Portugal are the two other European countries that have accepted bailout packages from wealthier European neighbors, and the governments in both places quickly lost power.

Power is likely to change hands in Spain in elections on Nov. 20. And French President Nicolas Sarkozy has to hope that the euro crisis is better contained by next year or his reelection chances could be undermined as well.

“Across Europe, you have electorates that are revolting against the efforts to stabilize the euro zone, on both sides of the equation,” says Charles Kupchan, a former European affairs director on the National Security Council. “As a consequence, you have leaders right across the continent that are finding it very difficult to conduct business.”

Continued Uncertainty

Papandreou appeared to put the rescue package at risk with his call on Monday to put it before voters in a referendum. Under intense pressure from other European leaders, he backed away from that position on Thursday.

But, as Kupchan suggests, that doesn’t solve the underlying problem, which is that markets remain nervous not just about Greece, but Italy, Spain and, increasingly, France as well.

“Investors know that the European Union doesn’t have the firepower to bail Italy out,” says Simon Tilford, chief economist for the Centre for Economic Reform in London.

Italy’s economy is three times larger than that of Greece, Ireland and Portugal combined. Italy is already paying interest rates that are roughly three times higher than that paid by the U.S. or Germany.

Italian Prime Minister Silvio Berlusconi, who narrowly survived a confidence vote last month, announced Thursday that he will soon hold more such votes to measure support for his economic policies.

“Berlusconi has nine lives, but this could be the one that finally takes him out,” says Damon Wilson, executive vice president of the Atlantic Council.

Containing Contagion

France’s borrowing costs are already rising, too, Tilford points out. France actually has been running larger deficits than Italy and its banks are heavily exposed to problems in the nations to its south.

All year, Sarkozy had been gearing up to host the current G-20 summit as a showcase for his country. Instead, because of the situation in Greece, it’s become a nightmare for him to manage.

Sarkozy’s poll numbers are already the lowest in the past half-century, Wilson says.

If France switches from acting as one of the leaders of Europe’s recovery effort to being one of its undeniably ailing economies, Tilford suggests, “there’s absolutely no chance that Sarkozy would be reelected.”

Anti-Establishment Sentiment

The anti-incumbent fever in Europe has followed no clear ideological course. Some countries have gone from left or center to right in their politics, while others have gone in the opposite direction.

Ultra-right parties in countries such as Hungary and Finland have also gathered strength as a result of the euro’s near-meltdown.

“There is such distrust and anger among the people toward what we would call establishment parties that they are certainly more willing and open to listening to extremist parties, because they speak to their concerns,” says Heather Conley, director of the Europe program at the Center for Strategic and International Studies.

If Sarkozy were to lose in France, power would likely go to Socialists who might decide that the austerity measures being pushed onto countries such as Greece and Italy is not the right way to go, Tilford says. “That would create a profound division between France and Germany,” he says.

No Credit For Extending Credit

German Chancellor Angela Merkel has emerged as the leading manager of the euro crisis. It is a role she appeared reluctant to accept. For more than a year, she was buffeted by domestic political opinion in her country that viewed bailouts as expensive rewards handed out to profligate neighbors.

“Over the last couple of months, she seems to have turned the corner and is now out in front,” says Kupchan, now a senior fellow at the Council on Foreign Relations.

Merkel has made it increasingly clear through public pronouncements, as well as Germany’s call for revising European Union treaties, that she sees her country’s future as inextricably tied to that of Europe as a whole. But that hasn’t made the bailouts much more popular at home.

So far, Germany appears to have survived the recession and the euro crisis as well as any European country, yet Merkel seems to get little political credit for this, suggests Thomas Kleine-Brunhoff, senior director for strategy at the German Marshall Fund.

Her government is seen as “weak and unreliable,” he says, while her careful and cautious embrace of the role of leader in addressing the crisis has undermined confidence among both markets and voters. “If you look at German polls and the election were held today, the German chancellor herself would be replaced,” Kleine-Bronhoff says.

Like just about every politician in Europe, Merkel is finding the hard economic medicine needed to sustain the euro is something voters are not eager to swallow.

“The prospects for growth are poor and it’s going to get worse before it gets better,” Kupchan says. “Leaders and electorates therefore have to hunker down and accept tough times.”